Over time you’ll see sales tax as a percentage added to the price of goods or services; you pay it at checkout, the seller collects it and remits it to government. Its rate and rules vary by location, may exempt some items, and affect your budgeting and a business’s registration, collection, and reporting responsibilities.
Key Takeaways:
- Sales tax is a percentage added to the price of goods or services, collected by the seller and sent to the government.
- Rates and rules vary by state and locality; some items may be exempt or taxed differently.
- Businesses must register, calculate, collect, and remit the tax according to jurisdictional rules.
- Consumers pay sales tax at purchase; online sales are often taxed based on the buyer’s location.
- Accurate recordkeeping and timely filings prevent penalties and audits.
What is Sales Tax?
When you buy goods or services, sales tax is the extra percentage added at checkout that the seller collects and sends to state or local government. Rates range widely – some states like Oregon and Delaware have no statewide tax, California’s base rate is 7.25%, and combined local charges can push totals above 8-10% in certain cities.
Definition
You can view sales tax as a consumption tax applied at the point of sale: the seller calculates it from the purchase price, collects it from you, then remits it to tax authorities. Taxable items vary by jurisdiction-groceries or prescription medicines are often exempt-and registration and filing rules depend on your sales volume and nexus.
Purpose of Sales Tax
Beyond raising revenue, sales tax funds services you use daily: K-12 education, roads, police, and local transit. The 2018 South Dakota v. Wayfair decision let states require remote sellers to collect tax using economic nexus thresholds (commonly $100,000 in sales or 200 transactions), which materially increased collections from online commerce.
You should also know sales tax shapes policy and fairness: because it can be regressive, jurisdictions frequently exempt necessarys or provide credits to lower-income households. For instance, many states tax restaurant meals but exempt unprepared groceries, affecting both consumer choices and the stability of revenue streams.
How Sales Tax Works
When you buy goods or taxable services, sales tax is added at the point of sale and collected by the seller; rates combine state, county and city levies so a 7.25% state base plus 1.5% local yields 8.75%, turning a $100 purchase into $108.75. Sellers register, collect from customers, and remit those collections to the state on a set schedule, and online sales follow nexus rules established after the Wayfair decision.
Calculation of Sales Tax
You compute sales tax by multiplying the taxable price by the combined rate: taxable base × (state rate + local rate). For example, a $120 taxable item in a jurisdiction with 6% state + 1.5% local (7.5% total) carries $9.00 tax, making the total $129.00. Exemptions and reduced rates (groceries, prescriptions) change the taxable base.
Where Sales Tax Applies
States typically tax tangible personal property, while services vary: importants like groceries and prescription drugs are often exempt or taxed at lower rates, clothing may be exempt in some states, and digital goods or streaming services are taxed in others. For instance, a haircut is usually taxable but financial advice or legal consulting often aren’t, depending on state law.
If you sell across state lines, nexus rules control collection obligations: after South Dakota v. Wayfair (2018), many states require remote sellers to collect when you exceed thresholds such as $100,000 in annual sales or 200 transactions into the state. Thresholds, resale and non‑profit exemptions, and drop‑ship rules differ by state, so you must check each jurisdiction where you have customers.
Sales Tax Rates
States differ widely: state-level sales tax ranges from 0% in Delaware, Oregon, Montana and New Hampshire to a 7.25% base in California, while Alaska has no statewide rate but many local taxes. You’ll commonly see combined state-plus-local rates above 8-9% in major metros; some zip codes exceed 10%. That variability affects pricing, sourcing rules and what you pay at checkout.
State Variations
States also diverge on what’s taxable: many exempt groceries or prescription drugs, while others tax prepared food and clothing. New York, for example, excludes most clothing and footwear under $110. You must follow each state’s definitions, filing rules and economic nexus thresholds-after Wayfair many states use $100,000 in sales or 200 transactions as triggers-when you register and collect.
Local Sales Tax
Cities, counties and special districts layer local rates on top of the state rate; a city levy of 1-3 percentage points is common. Your final rate depends on the delivery address-online shoppers are charged the destination rate-so identical purchases can carry different taxes across town. In some jurisdictions the combined rate reaches or exceeds 10%, affecting price competitiveness and margins.
Special district taxes fund transit, stadiums or schools and can add 0.5-3% in affected ZIP codes; in California some district levies push totals past 10%. You need ZIP-level sourcing when you sell, because you’ll collect for multiple jurisdictions and remit separately; sales-tax automation or tax tables keyed to ZIP+4 help prevent undercollection and costly audits.
Exemptions and Exclusions
Common Exemptions
Groceries, prescription medicines, certain medical devices, nonprofit sales, and manufacturing equipment are commonly exempt from sales tax. You often must present an exemption or resale certificate to the seller, and audits focus on improper use. For instance, many states run back-to-school tax holidays for a weekend or week, suspending tax on clothing and school supplies. Check your state’s revenue guidance for documentation and thresholds that apply to your transactions.
- Groceries (typically unprepared food)
- Prescription medicines and qualifying medical devices
- Sales by registered nonprofits with exemption letters
- Manufacturing equipment and raw materials used in production
- Perceiving your eligibility, apply for an exemption certificate to prevent unnecessary tax collection
| Exemption | Typical criteria |
| Groceries | Unprepared food intended for home consumption |
| Prescription drugs | Dispensed by a licensed pharmacy with Rx |
| Nonprofits | 501(c)(3) status or state-recognized exemption letter |
| Manufacturing inputs | Directly used in production; may require certificate |
Types of Goods and Services
Tangible personal property is taxable in most states, while services vary widely; digital goods (streaming, downloads) are now taxed in roughly two dozen jurisdictions. You should evaluate whether your sale is tangible, digital, or a service because sourcing rules and nexus determine where tax applies. Professional services like legal or accounting might be exempt in one state and taxable in another, so verify the local statutes affecting your sales.
Clothing tax treatment differs by state-some exempt everyday apparel, others tax all clothing-and prepared food is often taxed when sold hot or with utensils. You should track thresholds, such as de minimis rules or $50 caps used by some states during tax holidays. Audits frequently target mixed transactions, so separate invoicing for taxable and non-taxable portions reduces risk.
- Tangible goods (generally taxable)
- Digital goods and software (taxed in many states)
- Services (varies: taxable in some states, exempt in others)
- Food (grocery vs. prepared food distinctions)
- Perceiving mixed sales, separate invoices to clarify taxable and non-taxable portions
| Type | Typical treatment |
| Tangible goods | Usually taxable where the buyer takes possession |
| Digital goods | Taxed in many jurisdictions; rules evolving |
| Services | State-dependent; professional services often exempt |
| Food | Groceries often exempt, prepared food often taxed |
Sales Tax vs. Other Taxes
Comparison with Income Tax
You deal with sales tax at the register-it’s levied on purchases and remitted by sellers, often at state rates like 4-7.25% (California base 7.25%), whereas income tax is assessed on your earnings with federal brackets from 10% to 37% (2024) and state additions; sales tax is transactional and can be regressive, while income tax is progressive and affects withholding, estimated payments, and annual filings.
Sales Tax vs. Income Tax – Quick Comparison
| Sales Tax | Income Tax |
|---|---|
| Charged at point of sale on goods/services | Charged on individual or business income annually |
| Flat or local-variable rates (e.g., 0-10%+ by jurisdiction) | Progressive federal brackets (10-37%) plus state rates |
| Collected by seller, remitted monthly/quarterly | Withheld by employer or paid via estimated taxes |
| Often exempts groceries, prescriptions, nonprofits | Allows deductions, credits, exemptions per tax code |
Differences from Value-Added Tax
You pay sales tax once at retail; VAT is charged at each production stage with businesses reclaiming input VAT, so a 20% VAT (common in EU countries like the UK) might be applied across supply chains but only the net value is borne by the final consumer-this makes VAT broader in base yet less visible per transaction.
You should note that VAT requires invoice-level tracking and input tax credits, which changes cash flow: suppliers remit VAT collected minus VAT paid on inputs, preventing tax-on-tax cascading. For exports, VAT is often zero-rated so you reclaim input VAT, helping competitiveness; administratively, VAT systems demand robust bookkeeping and can raise compliance costs for small businesses compared with simple retail sales tax collection.
The Impact of Sales Tax
State and local sales taxes shape budgets and buying choices: they can raise billions annually and influence where you shop. For example, California’s base rate is 7.25% and some localities push combined rates above 10% (Chicago totals about 10.25%). After South Dakota v. Wayfair, many states also collect from online sellers, changing prices and competition. For more basics see What is sales tax?
On Consumers
You feel sales tax at the register; a 6% tax adds $60 to a $1,000 purchase and sales taxes are generally regressive, hitting lower-income households harder. Exemptions for groceries or prescriptions can save you hundreds annually, while targeted holidays or temporary cuts can boost short-term spending in specific sectors.
On Businesses
Your business must collect, remit, and report taxes across jurisdictions with differing rules and rates. Many states adopted nexus thresholds after Wayfair (commonly $100,000 in sales or 200 transactions), so remote sellers now face collection obligations; failure to comply can trigger audits, penalties, and lost sales opportunities.
Expect administrative costs: tax automation software often ranges $50-$500 per month depending on volume, and filing frequency (monthly, quarterly, annually) depends on collected tax amounts. You also hold collected tax in trust until remittance, so cash-flow timing, accurate records, and staff time for audits and reconciliations materially affect your bottom line and operational planning.
Summing up
The takeaway is that sales tax is a state or local levy added to the price of goods and many services; you pay it at the point of purchase, sellers collect and remit it, and rates, rules, and exemptions differ by jurisdiction, so you should check your local laws to know what applies to your purchases.
FAQ
Q: What is sales tax explained in simple terms?
A: Sales tax is a percentage added to the price of goods or services at the point of sale. The buyer pays the tax, the seller collects it and then sends it to the government. It is typically shown on the receipt and funds public services like roads, schools and emergency services.
Q: Who is responsible for collecting and remitting sales tax?
A: Sellers register with the state or local tax authority, collect sales tax from customers at checkout, and remit those amounts on a regular schedule. If a seller has nexus (a required connection such as a physical presence or enough sales in a state), they must collect tax; thresholds and rules vary by jurisdiction.
Q: How do you calculate sales tax?
A: Multiply the taxable price by the applicable tax rate. Sales tax = price × tax rate. Total paid = price + sales tax. Example: a $50 item with a 7.5% tax has $50 × 0.075 = $3.75 tax, so the total is $53.75. Many places combine state, county and local rates into one final percentage.
Q: Which items are typically exempt or not taxed?
A: Exemptions vary by jurisdiction but often include vitals like unprepared groceries, prescription medications and some medical services. Sales for resale are not taxed when the buyer provides a valid resale certificate. Nonprofit organizations, certain manufacturing inputs, and temporary sales-tax holidays can also reduce or remove tax on specific items.
Q: How does sales tax apply to online purchases and remote sellers?
A: Online marketplaces often collect and remit sales tax on behalf of sellers. Remote sellers must collect tax if they meet a state’s economic nexus thresholds (for example, a specific dollar amount of sales or number of transactions). If tax isn’t collected at purchase, the buyer may owe use tax to their state. Rules and collection responsibilities differ by state and platform.